Capital gains tax (CGT) is to be re-introduced in Sri Lanka. The proposed legislation will amend and repeal the current Inland Revenue Act No 10 of 2006. The legislation is pending Parliamentary approval but is expected to be adopted.
CGT will be charged at the rate of 10% on capital gains that exceed LKR 50,000. The gain is calculated as the consideration received for the asset or liability exceeding the cost of the asset or liability at the time of realisation.
The following assets are subject to CGT.
- land or buildings
- a membership interest in a company, partnership or trust
- a security or other financial asset
- an option, right or other interest in an asset referred to above
Trading stock and depreciable assets are specifically excluded from CGT.
The principal place of residence of an individual, provided it has been owned by the individual continuously for the three years before disposal and lived in for at least two of those three years, is not subject to CGT.
The sale of shares of companies listed on the Colombo Stock Exchange will not be subject to CGT.
Cost of an Asset
The cost of an asset is defined to include the expenditure (including incidental expenditure such advertising, agency fees, transfer tax, etc.) incurred in acquiring the asset (including, expenditure on construction, manufacture or production of the asset), in altering, improving, maintaining or repairing the asset.
Realisation of an Asset – Transactions that are subject to CGT
CGT is levied and becomes payable on the realization of an asset. The following transactions will be subject to CGT and the person who owns the asset will be deemed to have derived a value equal to the net cost of the asset.
- Transfer of ownership of an asset (including when the asset is sold, exchanged, transferred, distributed, cancelled, redeemed, destroyed, lost, expired, expropriated or surrendered) including to a spouse;
- When a debt claim is being written off as bad by the person;
- When the person begins to employ trading stock, a depreciable asset, a capital asset of a business or an investment asset in such a way that it ceases to be an asset of any of those types;
- When a person resident in Sri Lanka ceases to be resident in Sri Lanka all assets owned by the person is deemed to be realized’
- Where an individual transfers ownership of an asset to a spouse on death, divorce settlement or bona fide separation agreement;
- Where an asset is transferred pursuant on the death of its owner;
- Where a person transfers ownership of an asset to an associate by way of a gift;
- Where rights or obligations lasting for more than 50 years relating to an asset owned by a person is assigned to another (including by way of lease of such asset); and
- Where a person transfers an asset under a finance lease or instalment sale.
CGT will be levied on the above transactions, provided the net cost of these assets accrue a gain to their owner at the point of realization. In other words, at the point of realization if the net cost of the asset is zero, there is no gain and therefore CGT will not arise. As per the Bill, in case of realisation of inherited property, the net cost of the asset is deemed zero – ie. Effectively removing the applicability of CGT to inherited property notwithstanding the fact that the draft legislation deals with CGT on inherited property plus outline specific exemptions where CGT will not apply to inherited property. It will be interesting to see if Parliament will approve the net asset cost allocated to inherited property.
Involuntary Realisation of Asset
If an asset is involuntarily realized by way of either sale, exchange, transfer, distribution, cancellation, redeem, destruction, misplacement, expiry, expropriation or surrender, and the owner of such asset acquires a replacement asset during the period of 6 months before and one year after the realization of the asset, the owner is deemed to be deriving a value equal to the net cost of the asset. However the cost incurred in acquiring the replacement asset can be considered when arriving at the value liable for tax.
The legislation empowers the Commissioner General of Inland Revenue to determine whether replacement of one security of a company with another security in the same company or different company (including as a result of merger, demerger or reconstruction) will constitute an involuntary realization for the purpose of capital gains tax.
Implementation and obligation to ensure CGT is paid
Any person who is required to accept, register or approve the transfer of an asset (which includes notaries and attorneys), is required to be satisfied that the applicable CGT has been paid prior to accepting, registering or approving such transfer.
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